Public finance
Policies Agricultural Economic Energy Industrial Investment Social Trade Fiscal Monetary Policy mix
Fiscal policy Budget policy Debt internal Deficit / surplus Finance ministry Fiscal union Revenue Spending deficit Tax
Monetary policy Bank reserves requirements Discount window Gold reserves Interest rate Monetary authority central bank currency board Monetary base Monetary (currency) union Money supply
Trade policy Balance of trade Free trade Gains from trade Non-tariff barrier Protectionism Tariff Trade bloc Trade creation Trade diversion Trade / commerce ministry
Revenue Spending Non-tax revenue Tax revenue Discretionary spending Mandatory spending
Optimum Balanced budget Economic growth Price stability
Reform Fiscal adjustment Monetary reform
Portal
v t e

The government budget balance, also referred to as the general government balance,^[1] public budget balance, or public fiscal balance, is the difference between government revenues and spending. For a government that uses accrual accounting (rather than cash accounting) the budget balance is calculated using only spending on current operations, with expenditure on new capital assets excluded.^{[2]: 114–116} A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A government budget presents the government's proposed revenues and spending for a financial year.

The government budget balance can be broken down into the primary balance and interest payments on accumulated government debt; the two together give the budget balance. Furthermore, the budget balance can be broken down into the structural balance (also known as cyclically-adjusted balance) and the cyclical component: the structural budget balance attempts to adjust for the impact of cyclical changes in real GDP, in order to indicate the longer-run budgetary situation.

The government budget surplus or deficit is a flow variable, since it is an amount per unit of time (typically, per year). Thus it is distinct from government debt, which is a stock variable since it is measured at a specific point in time. The cumulative flow of deficits equals the stock of debt when a government employs cash accounting (though not under accrual accounting).

Sectoral balances

The government fiscal balance is one of three major sectoral balances in the national economy, the others being the foreign sector and the private sector. The sum of the surpluses or deficits across these three sectors must be zero by definition. For example, if there is a foreign financial surplus (or capital surplus) because capital is imported (net) to fund the trade deficit, and there is also a private sector financial surplus due to household saving exceeding business investment, then by definition, there must exist a government budget deficit so all three net to zero. The government sector includes federal, state and local governments. For example, the U.S. government budget deficit in 2011 was approximately 10% GDP (8.6% GDP of which was federal), offsetting a capital surplus of 4% GDP and a private sector surplus of 6% GDP.^[3]

Financial journalist Martin Wolf argued that sudden shifts in the private sector from deficit to surplus forced the government balance into deficit, and cited as example the U.S.: "The financial balance of the private sector shifted towards surplus by the almost unbelievable cumulative total of 11.2 per cent of gross domestic product between the third quarter of 2007 and the second quarter of 2009, which was when the financial deficit of US government (federal and state) reached its peak...No fiscal policy changes explain the collapse into massive fiscal deficit between 2007 and 2009, because there was none of any importance. The collapse is explained by the massive shift of the private sector from financial deficit into surplus or, in other words, from boom to bust."^[3]

Economist Paul Krugman explained in December 2011 the causes of the sizable shift from private deficit to surplus: "This huge move into surplus reflects the end of the housing bubble, a sharp rise in household saving, and a slump in business investment due to lack of customers."^[4]

The sectoral balances (also called sectoral financial balances) derive from the sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley.^[5]

GDP (Gross Domestic Product) is the value of all goods and services produced within a country during one year. GDP measures flows rather than stocks (example: the public deficit is a flow, measured per unit of time, while the government debt is a stock, an accumulation). GDP can be expressed equivalently in terms of production or the types of newly produced goods purchased, as per the National Accounting relationship between aggregate spending and income:

${\displaystyle Y=C+I+G+(X-M)}$

where Y is GDP (production; equivalently, income), C is consumption spending, I is private investment spending, G is government spending on goods and services, X is exports and M is imports (so X – M is net exports).

Another perspective on the national income accounting is to note that households can allocate total income (Y) to the following uses:

${\displaystyle Y=C+S+T}$

where S is total saving and T is total taxation net of transfer payments.

Combining the two perspectives gives

${\displaystyle C+S+T=Y=C+I+G+(X-M).}$

Hence

${\displaystyle S+T=I+G+(X-M).}$

This implies the accounting identity for the three sectoral balances – private domestic, government budget and external:

${\displaystyle (S-I)=(G-T)+(X-M).}$

The sectoral balances equation says that total private saving (S) minus private investment (I) has to equal the public deficit (spending, G, minus net taxes, T) plus net exports (exports (X) minus imports (M)), where net exports is the net spending of non-residents on this country's production. Thus total private saving equals private investment plus the public deficit plus net exports.

In macroeconomics, the Modern Money Theory describes any transactions between the government sector and the non-government sector as a vertical transaction. The government sector includes the treasury and the central bank, whereas the non-government sector includes private individuals and firms (including the private banking system) and the external sector – that is, foreign buyers and sellers.^[6]

In any given time period, the government's budget can be either in deficit or in surplus. A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends. Sectoral balances analysis shows that as a matter of accounting, government budget deficits add net financial assets to the private sector. This is because a budget deficit means that a government has deposited, over the course of some time range, more money and bonds into private holdings than it has removed in taxes. A budget surplus means the opposite: in total, the government has removed more money and bonds from private holdings via taxes than it has put back in via spending.

Therefore, budget deficits, by definition, are equivalent to adding net financial assets to the private sector, whereas budget surpluses remove financial assets from the private sector.

This is represented by the identity:

${\displaystyle (G-T)=(S-I)-NX}$

where NX is net exports. This implies that private net saving is only possible if the government runs budget deficits; alternately, the private sector is forced to dissave when the government runs a budget surplus.

According to the sectoral balances framework, budget surpluses offset net saving; in a time of high effective demand, this may lead to a private sector reliance on credit to finance consumption patterns. Hence, continual budget deficits are necessary for a growing economy that wants to avoid deflation. Therefore, budget surpluses are required only when the economy has excessive aggregate demand, and is in danger of inflation. If the government issues its own currency, MMT tells us that the level of taxation relative to government spending (the government's budget deficit or surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.

Primary balance

"Primary balance" is defined by the Organisation for Economic Co-operation and Development (OECD) as government net borrowing or net lending, excluding interest payments on consolidated government liabilities.^[7]

Primary deficit, total deficit, and debt

The meaning of "deficit" differs from that of "debt", which is an accumulation of yearly deficits. Deficits occur when a government's expenditures exceed the revenue that it levies. The deficit can be measured with or without including the interest payments on the debt as expenditures.^[8]

The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt.^[8]

Therefore, if ${\displaystyle t}$ refers to an arbitrary year, ${\displaystyle G_{t}}$ is government spending and ${\displaystyle T_{t}}$ is tax revenue for the respective year, then

${\displaystyle {\text{Primary deficit}}=G_{t}-T_{t}.\,}$

If ${\displaystyle D_{t-1}}$ is last year's debt (the debt accumulated up to and including last year), and ${\displaystyle r}$ is the interest rate attached to the debt, then the total deficit for year t is

${\displaystyle {\text{Total deficit}}_{t}=r\cdot D_{t-1}+G_{t}-T_{t}\,}$

where the first term on the right side is interest payments on the outstanding debt.

Finally, this year's debt can be calculated from last year's debt and this year's total deficit, using the government budget constraint:

${\displaystyle {D_{t}}=(1+r)D_{t-1}+G_{t}-T_{t}.\,}$

That is, the debt after this year's government operations equals what it was a year earlier plus this year's total deficit, because the current deficit has to be financed by borrowing via the issuance of new bonds.

Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.

Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.total borrowing=fiscal deficit of that year

Structural deficits, cyclical deficits, and the fiscal gap

A government deficit can be thought of as consisting of two elements, structural and cyclical. At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g., on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit. By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle.

The structural deficit is the deficit that remains across the business cycle, because the general level of government spending exceeds prevailing tax levels. The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus.

Some economists have criticized the distinction between cyclical and structural deficits, contending that the business cycle is too difficult to measure to make cyclical analysis worthwhile.^[9]

The fiscal gap, a measure proposed by economists Alan Auerbach and Laurence Kotlikoff, measures the difference between government spending and revenues over the very long term, typically as a percentage of gross domestic product. The fiscal gap can be interpreted as the percentage increase in revenues or reduction of expenditures necessary to balance spending and revenues in the long run. For example, a fiscal gap of 5% could be eliminated by an immediate and permanent 5% increase in taxes or cut in spending or some combination of both.^[10]

It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many developed countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone.^{[citation needed]}

National government budgets

This article needs to be updated. Please help update this article to reflect recent events or newly available information. (November 2011)

Data are for 2010:^[11]